Economic Theory - Production and Revenue

Flashcards covering key vocabulary from the BCOM203 Economic Theory Unit 6 lecture notes, focusing on Production and Revenue.

Production

The process involved in manufacturing goods from raw materials or various inputs that are required for creating a finished product through manufacturing. It transforms inputs into outputs that eventually provide value to the customer.

Production Function

States the functional relationship between the factors for production and the number of products. It describes the link between the factors of production and the final output obtained.

Total Production (TP)

Refers to the total units of output produced per unit of time by all factor inputs.

Average Production (AP)

The total production per unit of a given variable factor. It is calculated by dividing the total product by the number of variable factors (AP = TP/QVF).

Marginal Production (MP)

Refers to the additional units produced with the usage of the last variable factor. It is the change in total production that takes place due to the addition of a variable factor.

Short-Run Production Function

Explains the relationship between the input and output where there is one variable factor, and the quantities of all other factors are fixed.

Long-Run Production Function

Refers to the time where all the input factors are variable in the same proportion. The organization can make changes and adjustments in all the factors of production and quantity produced according to the situation.

Law of Variable Proportions

Determines the short-run relationship between the alterations in the output and inputs, where some factors are fixed and some are variable.

Law of Returns to Scale

Refers to the change in output due to the change in the scale of factors in the form of inputs in the same proportion in the long run.

Increasing Returns to Scale

The situation when the factors of production are increased and with this the output of the firm too increases at a higher rate.

Constant Returns to Scale

Refers to a situation where all inputs are increased by a certain percentage and an increase, in the same percentage is experienced in the output.

Diminishing Returns to Scale

Refers to a situation of production where all the factors of production are increased in a specified proportion but the output increases in a smaller proportion only.

Isoquant

A locus of points that represent the different technically efficient ways of combining the factors of production for producing a fixed level of output. Also known as the 'equal product curve'.

Marginal Rate of Technical Substitution (MRTS)

The rate at which one factor of input should decrease for maintaining the same level of output when another factor is increased. MRTS = MPL/MPK

Revenue

The income obtained by a firm through its various business operations involving the selling of goods and services at different prices.

Total Revenue (TR)

The total income that a seller or producer earns after selling the output. TR = AR × Q

Average Revenue (AR)

Refers to the revenue received by the seller after selling the per unit commodity. It is calculated by dividing the total revenue by total output. AR = TR/Q

Marginal Revenue (MR)

The net revenue obtained by selling an extra unit of the concerned commodity. MR = /ΔTR/ΔQ